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Hello from Brussels. All the talk here is about the EU’s great crisis with Poland over money and the rule of law. As far as we are concerned, this illustrates how Brussels’ plans to become a geopolitical power and to use trade to project European values abroad, etc., are often quite weakly disappointed by internal events. It’s a bit difficult to talk about promoting democracy and freedom in the Indo-Pacific when you have trouble enforcing them in a country neighboring Germany.
Today’s main article is on industrial subsidies, which undoubtedly distort world trade, but – and this is a big part of the problem – we don’t really know by how much.
Chartered waters examines how the UK supply chain suffers from a lack of warehouse space.
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Hidden money and open trade
Sometimes it seems to us that the importance of something in trade is in inverse proportion to our ability to measure it, or even to define it. We spend a lot of time talking about tariffs on goods (steel, aluminum, agriculture) because you can give them a percentage value and they affect trade pretty much by definition. Government subsidies to industry? Much more difficult to assess their size and effect. You can figure out cash payouts and tax breaks, assuming you can identify them, but the myriad of ways the tiered Chinese state extends below-market loans to privileged companies is harder to pin down.
To give a specific example: We have already written about how commercial and EU lawyers started implementing a clever plan last year to tackle Chinese subsidies to companies outside China, starting with a case in Egypt. We speculated that this could pave the way for a broad-spectrum legal campaign against handouts that facilitate the China Belt and Road initiative. In case that just hasn’t happened: No new cases since the start of last year, as far as we can tell. It is apparently too difficult to prove exactly how China subsidizes.
In this vacuum, Global Trade Alert, the analytical service at the University of St. Gallen in Switzerland, which for over a decade has done an excellent job of documenting acts of protectionism that go unreported to World Trade Organization or otherwise registered. The latest Global Trade Alert report, combing through official documents, finds that business subsidies officially notified by governments to the WTO are massively smaller than their actual size.
Even before the pandemic, more than 80% of merchandise imports into China and the EU were in products for which subsidies had been received by local competitors (the figure for the United States is 66%). Almost two-thirds (62%) of global trade was in products and trade routes where subsidized companies from the US, EU and China compete.
Now we should give the caveats familiar with Global Trade Alert. It does not directly measure the magnitude of the distorting effect of subsidies and is more useful in revealing a massive unrecognized problem than providing a definitive guide to measuring it. But the report is certainly correct in concluding that there is a clear need to better record subsidies and their economic effects, not to mention discussions about new rules to constrain them.
The debate over subsidies as a trade issue is becoming increasingly important. Pandemic-linked business bailouts are one thing, but the transition to a green economy has the potential to make handouts last much longer. EU competition commissioner Margrethe Vestager recently told the Financial Times that the suspension of EU state aid rules will continue for longer and some may end up being lifted permanently.
Let’s not overreact and espouse a staunch libertarian loathing of all government grants. Technologies with the potential to reduce carbon emissions have positive externalities that save the planet and justify state intervention. And of course, it is possible to design some of these subsidies in such a way as not to distort trade: the tax breaks given to consumers to buy electric cars, rather than to producers to manufacture them, are one example. And there are subsidy rules at the WTO that cover subsidies that are downright illegal and those that can be challenged through dispute settlement or countervailing duty.
But figuring out what these rules apply to and how to calculate them is subject to considerable uncertainty, and writing new ones even more. For example: we are more than some fans of the EU-US Airbus-Boeing dispute, given its role in limiting subsidies. But it doesn’t create certainty about future spending programs to find an unconvincing fudge to resolve 17 years of wrangling over specific issues. (Whether it was an implicit state subsidy to Airbus to use public funds to extend the runway at German Bremen Airport to allow the A380 to land was perhaps our problem. preferred in the dispute.)
Likewise, one of the ways in which the WTO dispute settlement process has annoyed the United States is by defining a narrow definition of what constitutes a “public body” – something which in turn limits what constitutes a “public body”. can be defined as a state subsidy. We have some sympathy for the United States, given that this somewhat narrow definition gets China off the hook for much of the state support it provides.
The US, EU and Japan have been promising for years to draft a broader definition that they can suggest as a change in WTO rules, but they can’t even get along with each other. In any case, the chance that Beijing will voluntarily adhere to a new fundamental constraint on its industrial policy is close to zero.
There is a big test ahead of how subsidies can be defined, measured and treated. As we have already noted, the EU, as part of its general strategy of creating unilateral tools where multilateral tools do not work, is developing a rule on foreign subsidies that essentially expands its aid regime. State to foreign companies operating in the European market. . We will come back to the evolution of the plans in due course. But the fact that the EU feels pushed to this point underscores dissatisfaction with the way the current global subsidy regime works.
The supply chain issues plaguing the global economy are a multi-headed beast. One of those problems, so to speak, is the lack of warehouse space.
When the demand for durable consumer goods is so strong, it can seem counterintuitive. The warehouses would surely be empty because people buy inventory as soon as it becomes available, right? However, it is a bit more complex in practice.
What seems to be happening is this. Goods are made up of many parts and a shortage of some of these parts means that those in them stay on the shelves longer than usual. A labor shortage can also make the problem worse.
The graph below highlights the situation in the UK, where it looks like all of the UK’s biggest warehouses are now reserved. Claire Jones
Rare good news on supply chains. We are closely monitoring Ryan Petersen’s excellent performance Twitter feeds for some time. The CEO of Flexport headed for the ports of the West Coast of the United States to talk to workers about delays in removing containers from ships and out of port. One of the resulting tweets appears to have sparked a policy change that could save Christmas. If gloom is more your thing and you prefer to hear about it holiday shortages, here’s an article from the New York Times ($).
Nikkei reports ($) that China will restructure three rare earth producers create a state-owned enterprise with an almost 70 percent share of the national production quota for metals essential for high-tech manufacturing. In Japan, chicken has become (Nikkei, $) the most visible example of the global supply crisis, with 7 eleven stopping sales of its popular fried chicken snack and restaurants limiting portions to one chicken kebab per customer. Francesca Regalado and Claire Jones
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